Merrill's Reingold on merger talks (from Friday):
Investment Highlights:
· The Wall Street Journal this morning ran an
article speculating that WCOM and FON are
engaged in merger related talks to combine
the 2 LD companies. Speculation of this sort
has been out in the market for many months
now (especially in the last few weeks).
· We believe that a merger between the number
2 and 3 LD companies would be very logical
for both parties as it brings big synergies, fixes
WCOM's lack of a national wireless presence
and eliminates WCOM's 2nd largest
competitor, after AT&T, in the LD market.
· We suspect that the deal would be an all-stock
deal and that WCOM would create a new
wireless tracking stock to replace Sprint's
current PCS tracker. Therefore, the PCS
stock would essentially just change hands with
no additional premium specifically being paid
for PCS in addition to the premium WCOM
would pay for FON.
· PCS would still benefit, however, from the
synergies that come with WCOM's substantial
distribution sales channels and the advantage
of being part of a WCOM-offered bundle.
· Our 12-18 month $106 price objective is based
on a targeted 2000 P/E of 37x applied to $2.85.
The Wall Street Journal this morning ran an article
speculating that WCOM and FON engaged in merger
related talks to combine the 2 LD companies.
Speculation of this sort has been out in the market for
many months now (especially in the last few weeks).
We believe that a merger between the number 2 and
3 LD companies would be very logical for both
parties as it brings big synergies, fixes WCOM's lack
of a national wireless presence and eliminates
WCOM's 2nd largest competitor, after AT&T, in the
long distance market.
We suspect that the deal would be an all-stock deal and
that WCOM would create a new wireless tracking stock to
replace Sprint's current PCS tracker. Therefore, the PCS
stock would essentially just change hands with no
additional premium specifically being paid for PCS in
addition to the premium WCOM would pay for FON. PCS
would still benefit, however, from the synergies that come
with WCOM's substantial distribution sales channels and
the advantage of being part of a WCOM-offered bundle.
We modeled a potential pro-forma of the combined
company. In our models, we assumed that the combined
company can achieve $2.0B in cost synergies in the first
year after closing which we assume would roughly be
calendar year 2001. This compares with $2.5B in
synergies that WCOM managed to achieve in the first year
after closing the MCI acquisition.
Assuming an offer price of $70/sh for FON stock, and a
40-year goodwill amortization period, we estimate that the
deal would be 11% dilutive to WCOM. With a 25-year
goodwill period, dilution goes to 18%. If WCOM offers
only $60/sh instead of $70, dilution for the 40-year and 25-
year goodwill amortization periods would be much lower:
only 5% and 11% respectively.
The implication for others in the industry could be positive
as well as the combination of 2 of the top 3 LD companies
could help ease the pricing pressure in the LD market.
This could be good for companies like AT&T, QWST,
FRO/GBLX, etc.
We believe the courting process between WCOM and
FON will continue to be a long one (it's has already been
going on for close to a year on-and-off). Nothing can
happen without consent of Deutsche Telekom and France
Telecom since each owns 10% of FON and are tied
(unhappily) through their international joint venture,
Global One.
We further believe that it is very possible that DT could
make a counterbid for FON.
In our view, dilution of roughly 10%, in exchange for
achieving a great wireless solution, capturing the benefits
of huge cost synergies and improving the structure of the
long distance industry is well within the tolerable range for
WCOM shareholders. After a brief period of shareholder
churn, we suspect WCOM shares will rebound strongly
just as they did after the MFS and MCI acquisitions.
On the regulatory front, we believe a merger between
WCOM and FON would be subject to much of scrutiny
from the DOJ and could take well over a year to close as
the combined entity would have about 35% of the LD
market. We expect that for a deal to close, FON would
have to divest itself of its internet business and at least one,
if not more, RBOCs would have to be become a significant
competitor for LD market share in its region.
We are maintaining our Accumulate/Buy rating on
WCOM and are making no changes to our current
estimates of $1.97 and $2.85 for WCOM in '99 and '00.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Investment Highlights:
· Following today's article in the Wall Street Journal, speculating that
WCOM and FON/PCS may be in talks, some of the wireless stocks have
been under pressure, including Nextel and VoiceStream.
· Given that MCI WorldCom (WCOM) lacks a wireless presence, three
possible scenarios have often come up:
· One, WCOM could acquire Nextel's (NXTL, D-1-1-9, $67 27/32 ) national
iDEN network.
· Two, WCOM could roll-up the regional GSM operators, creating a
virtually nationwide GSM footprint (with the exception of PacBell's GSM
footprint in California and BellSouth's GSM footprint in North and South
Carolina).
· And, three, WCOM could acquire Sprint (FON), including Sprint's
nationwide PCS footprint (PCS, D-1-1-9, $74 1/2 ).
Fundamental Highlights:
· Today's article referenced a possible WorldCom/Sprint combination. So,
why the weakness in other stocks?
· In the case of Nextel, a WCOM/FON combination could be perceived as a
negative, especially given that WCOM and NXTL held talks earlier in the
year. In addition, if NXTL does not succeed in acquiring the NextWave
spectrum (currently tied up in bankruptcy court), investors might perceive
that NXTL not only lacks WCOM as a potential acquirer but also lacks the
additional frequency that might make the company more attractive to a
such a buyer.
· In the case of VoiceStream (VSTR, D-2-1-9, $68 3/4 ), there has been the
perception that if VSTR rolled-up the GSM markets that WCOM (or other
buyers) might be interested in that rolled-up footprint.
· In the meantime, we have no concrete new news, and fundamentals in the
wireless industry continue to be strong. Moreover, we believe that over the
long term, there are other buyers besides WCOM who could be interested
in a nationwide US footprint.
· We continue to maintain our intermediate term Buy ratings on Sprint PCS
and Nextel. We continue to maintain our intermediate term Accumulate
rating on VoiceStream. |
